US versus China – Who matters more in Asia?

By Edward Lee, Regional Head of Research for Southeast Asia at Standard Chartered Bank

China’s influence over Asia today is significant and growing. But it is by no means the only story in Asia. Perhaps due to China’s stellar rise, it is easy to overlook the substantial sway the US economy still holds over much of Asia.

Concerns over slower trend growth in China, along with the spectre of the US Federal Reserve’s ‘tapering’ of quantitative easing, has spooked global financial markets in recent months. On the positive side, though, China’s government is sticking close to its strategy of ensuring balanced and sustainable growth, and the US economy is recovering, helped by gains in the housing and labour markets.

China’s slowdown is likely to result in some moderation in Asia’s near-term growth. But any such short-term sacrifice should benefit both China and the rest of the region in the longer term. Such an outcome would be much more palatable than unabated over-investment in China, which may ultimately prove unsustainable and costly for the regional as well as the global economy.

Over-emphasising the slowdown in China’s trend growth risks neglecting the mitigating effect of the US recovery. The US is still the world’s largest economy, and is almost twice the size of China in terms of nominal gross domestic output.

Given this, it is timely to assess the relative influence of both China and the US on various countries in Asia. Which Asian economies are more exposed to the US and which are more reliant on Chinese demand for growth? In a recent study, we examined these linkages through overall growth and the channels of trade, tourism and foreign direct investment. We found that Northeast Asia and Singapore are more exposed to China than to the US, while India, the Philippines and Indonesia lie at the other end of the spectrum. Note that this does not mean India is as exposed to the US as Hong Kong is to China. This is a relative ranking.

Our study shows that, in the past five years, China’s importance to Asia has grown relative to the US. Over a longer period, though, Asia is more exposed to US headline growth than to China’s. It is vital for Asia that any slowdown in China be moderate and gradual so that economies can adjust without suffering too much volatility. The trade route underlines this point. Asia is a highly open region. Of the 10 economies we examined in the region, six have trade exceeding their total domestic economic output. Trade is a clear channel where China shows its dominance in Asia. This has been particularly true in recent years – all 10 countries in our study have increased their exports to China relative to the US since 2005. The increases were the most obvious in Hong Kong, Australia, Taiwan and South Korea.

As of 2012, only the Philippines and India sent more goods to the US than to China; the other eight economies sent more of their exports to China. Back in 2005, only three economies exported more goods to China than to the US. However, this analysis does not take into account the indirect trade exposure of each economy to the US. A significant portion of the region’s exports are re-exported by China to the US and other Western markets.

Tourism also links Asian economies together and influences regional growth.Tourism accounts for 2-8% of GDP for the economies we examined. Given its close proximity, China is the dominant source of international tourists for most of Asia, with the exception of India and the Philippines. Within Asia, Hong Kong, Taiwan and South Korea receive the largest number of Chinese tourists as a share of their total tourist arrivals. All 10 economies have seen a widening gap between the number of Chinese and US tourist arrivals since 2005. And Chinese tourists spend as much as US tourists (on a per-capita basis) in some places.

Foreign direct investment is another important channel through which the US and China influence growth in Asia. With the exception of Hong Kong, where China has made significant investments, the US remains the dominant investor in Asia. We expect US economic growth to accelerate to 2.7% in 2014 from 1.6% this year, and China’s growth to ease to 7.2% from 7.5%. Taking into account these forecasts, our study concluded that the net growth impact of a mild slowdown in China and a recovery in the US will be positive for Malaysia, Taiwan, Hong Kong, Singapore and Korea, all else being equal.

The importance of China to the health of the global, and Asian, economies is undeniable. But as long as China’s much-needed rebalancing is moderate and well calibrated, and US growth continues to show a reasonable improvement, Asia will stand to gain in both the short and long term.